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Jim Cramer Frets About 2008-Style Volatility Implosion

CNBC’s Jim Cramer says the current volatile market is seeing “a similar version” of what sparked the 2008 financial crisis.

"The real culprit behind today's decline is the same miscreant that's weighed us down for the last couple of days: the unspooling of these obscure products that allowed ... idiotic money managers and neophyte investors to bet against what's known as volatility," the "Mad Money" host told CNBC.

"Now they're all imploding," he said. "I swear, some of these dopes never learn. The current situation is like a similar version of what happened in 2008 after hedge funds levered up — borrowed money — to bet on mortgage-backed bonds," Cramer said.

Meanwhile, U.S. stocks opened sharply higher on Friday as technology and financial stocks rose, but the S&P 500 and Dow Jones Industrial Average remained on course for their biggest weekly losses in at least six years.

Stocks plunged another 4 percent on Thursday, overturning gains a day earlier and adding to the sense that a broader correction is firmly underway for Wall Street after nine years of almost uninterrupted gains.

Both the Dow Jones Industrial Average and the benchmark S&P 500 index are down more than 10 percent since hitting record highs on Jan. 26, and Thursday was the second time this week that the Dow fell more than 1,000 points.

At the heart of the pullback is a rise in U.S. bond yields due to growing expectations that a robustly performing economy will lead to higher inflation and a steady rise in official interest rates over this year, Reuters explained.

Investors also point to additional pressure from the violent unwinding of trades linked to bets on volatility staying low.

The market's main gauge of volatility, the CBOE Volatility Index, opened at a relatively elevated 32.18 on Friday, nearly three times what it was a week ago but lower than a two-and-a-half-year high of 50.30 points hit on Tuesday.

The danger for stock market investors is the Federal Reserve - and other major central banks - reining in the vast supplies of cheap funds they have pumped into the global economy since the 2008-09 financial crisis.

The downturn in equities had been long awaited by investors, after a period of strong and fast gains. The S&P correction is the fifth of this bull market, according to Yardeni Research. The last bear market was during the 2008 financial crisis.

"Here's the bottom line: we've seen this movie in bear markets before. When the market breaks down like this, the culprit is forced selling. ... This time, it's caused by the breakdown of these leveraged bets against volatility, and it won't stop until the bets are unwound," Cramer said.

"We don't know when things will get placid again, but until these traders get wiped out, finding winning stocks will be like finding a needle in a haystack. That's why I say you want to identify high-quality companies and use the weakness to scale into them gradually on the way down, betting that the VIX madness will end at some point. But the key is that you need to leave room to buy more at lower levels ... because where this thing stops, nobody knows, although if you stick with me and this show, I'll give you the best clues I know at least to try to find out."